Is Spectra Energy the Right Stock to Retire With?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Energy is the lifeblood of the world economy, but in order for it to do its job, oil and gas have to make their way to where they're needed. Natural gas pipeline company Spectra Energy (NYS: SE) helps in that job, with its 19,000-mile network of transmission pipelines and 37,600 miles of distribution and service pipelines serving more than a million residential and business customers. But with natural gas prices remaining extremely low, is Spectra the best play on the industry? Below, we'll look at how the company does on our 10-point scale.

The right stocks for retireesWith decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.

Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.

Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.

Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.

Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Spectra Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$20.1 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.95

Fail

Worst loss in past five years no greater than 20%

(36.3%)

Fail

Valuation

Normalized P/E < 18

17.92

Pass

Dividends

Current yield > 2%

3.6%

Pass

5-year dividend growth > 10%

5.2%

Fail

Streak of dividend increases >= 10 years

1 year

Fail

Payout ratio < 75%

55.5%

Pass

Total score

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only five points, Spectra Energy doesn't quite deliver everything conservative investors like to see from a stock. The company's dividend is attractive, but stagnant free cash flow and a stock price that appears to be near full value are marks against Spectra.

Spectra is the result of a spinoff from Duke Energy (NYS: DUK) , which separated Spectra's pipelines and gas utility segments from Duke's electric utility business back in 2007. After natural gas prices plummeted in the lead-up to the financial crisis, Spectra's shares fell sharply.

Since then, many gas producers have struggled. Chesapeake Energy (NYS: CHK) , once known almost solely for its natural gas assets, has started shifting more toward the oil side of the business, as has SandRidge Energy (NYS: SD) and several other smaller companies.

But the thing about the pipeline business is that volume can be just as important as price. With new sources of natural gas coming on-line all the time, pipeline infrastructure has never been more essential, as the controversy over TransCanada's (NYS: TRP) Keystone XL pipeline shows.

Moreover, big players in the industry are realizing the importance of pipelines and making strategic moves to boost their networks. With the Kinder Morganproposed acquisition of El Paso (NYS: EP) primed to add to Kinder Morgan Energy Partners' (NYS: KMP) already huge network of pipelines, Spectra will need to work hard to keep up.

For retirees and other conservative investors, Spectra's combination of regulated gas utility business and broader pipeline exposure offers both current income and potential growth. That may be worth paying a fair-value price for, especially if you want more energy exposure in your retirement portfolio.

Keep searchingFinding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

At the time this
article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of TransCanada, Chesapeake Energy, and Spectra Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.